A straightforward pricing guide: models, strategies, examples

For many CFOs, the sheer number of SaaS billing and pricing models can be overwhelming. The array of choices has become so large that it often requires specialized tools and processes to determine the SaaS billing process best suited to your company. 

That’s why we’ve written this guide to SaaS billing models, strategies, and examples aimed at CFOs who may find it overwhelming to navigate the various pricing models available. This post explores what SaaS billing is all about and discusses the ins and outs of SaaS billing models. We’ll also provide real-world examples of pricing tiers to help you choose the right model for your business. 

By the end of this guide, you should have a much clearer idea of how to construct and implement the ideal SaaS billing model for your company. Without further ado, read on to gain a deeper understanding of SaaS billing and make informed decisions for your company’s success. 

SaaS pricing (models, strategies, and examples)

We’ll start at the very beginning: What are SaaS billing models?

SaaS billing models are the billing and invoicing methods a SaaS company adopts. In a nutshell, it’s how you charge your customers for your services. 

Simple, right? Not so much.

Let’s peel back a few more layers.

What is SaaS pricing?

SaaS pricing refers to the pricing of your SaaS product. This is where you deliver on the value that your solution brings to your customers.  You want to deliver ROI to your clients on the problems they are looking to solve, and charge an amount that delivers on that brand promise.  To that end, subscription businesses operate on the basis of recurring charges over time. As a CFO, you’re probably aware that this has important ramifications for your choice of SaaS billing models. 

Let’s say you selected a pricing model that was 3% less profitable than it could have been. A 3% loss isn’t a huge deal, you might think. But remember, SaaS companies use recurring charges.  

That 3% in unrealized profits comes back with each new billing cycle, and soon you’re staring down considerable sums of lost cash. 

That’s why the SaaS billing process has important metrics and KPIs. Most finance teams use automated software to track their SaaS pricing metrics. 

SaaS pricing refers to the pricing of your SaaS product. This is where you deliver on the value that your solution brings to your customers.  You want to deliver ROI to your clients on the problems they are looking to solve, and charge an amount that delivers on that brand promise.  To that end, subscription businesses operate on the basis of recurring charges over time. As a CFO, you’re probably aware that this has important ramifications for your choice of SaaS billing models. 

Let’s say you selected a pricing model that was 3% less profitable than it could have been. A 3% loss isn’t a huge deal, you might think. But remember, SaaS companies use recurring charges.  

That 3% in unrealized profits comes back with each new billing cycle, and soon you’re staring down considerable sums of lost cash. 

That’s why the SaaS billing process has important metrics and KPIs. Most finance teams use automated software to track their SaaS pricing metrics. 

Another part of what makes SaaS billing complex is its unique accounting realities and requirements. Having the ability to recognize revenue over time, and manage deferred revenue waterfalls, is extremely important. Companies that lag in adopting automation will have an especially tough time in that department. 

Another part of what makes SaaS billing complex is its unique accounting realities and requirements. Having the ability to recognize revenue over time, and manage deferred revenue waterfalls, is extremely important. Companies that lag in adopting automation will have an especially tough time in that department. 

SaaS pricing strategies

It only takes a moment of researching SaaS billing strategies before you come up against the well-known “paradox of choice.” Between all the different hybrid billing options, potential feature bundles, freemium packages and more, it can feel impossible to know how to choose. 

We’re going to run through the most popular SaaS pricing strategies. After that, we’ll cover everything you need to know in order to confidently select the right one for your firm. 

Usage-based pricing model

Usage-based billing charges users by how much they use your product. Typically this involves a set amount of usage time that resets every month, but some other medium such as digital tokens might be used. 

Flat-rate pricing model

Flat-rate SaaS pricing enjoys enduring popularity among customers. They tend to see it as a transparent, “know what you’re paying upfront” type of transaction. On the other end, it offers companies a higher level of predictability with respect to recurring charges. It’s important to note that flat-rate pricing can also carry some opportunity costs because of its inflexibility.

Freemium pricing model

Everybody loves a free trial, and SaaS users are no exception. A freemium can be a great way to draw new users to your product. This is especially true if your company does project management software or anything that encourages users to develop a sense of investment or progress with your app, which they stand to lose once the free trial ends. 

Pricing tiers model

Using pricing tiers involves packaging different features together and charging a set price for each tier. If you have one or two features that tend to be standouts with your audience, you can slip them in or near the top tier to strategically drive more revenue. 

Per active user pricing model

This pricing model is popular in workplaces that use enterprise software. It involves charging different rates for different numbers of users. 25 users might cost $2,500 annually, whereas 50 users might be discounted at $4,500, and so on, with discount incentives usually increasing with additional users.

Per-feature pricing model

The per feature model is also referred to as “a la carte” pricing because it allows users to select and pay for features as they please. 

It’s not enough to simply know about SaaS billing models, though. You and your team need to equip yourselves with SaaS pricing metrics, as well as the accounting tools to run reports and forecasts on them. 

SaaS pricing metrics

As a SaaS CFO, the task of tracking all the various SaaS pricing metrics falls to you. This task gets nuanced quickly, given the large number of moving pieces and recurring charges involved. 

A few of your most pivotal pricing KPIs are your:

Expansion MRR

Expansion monthly recurring revenue (MRR) measures revenue increases from cross-sales and subscription upgrades. SaaS CFOs always want to see this metric increase, and frequently use automated revenue forecasting to help that happen. 

Gross MRR Churn Ratio

Your gross MRR churn ratio is another of your central SaaS pricing metrics and should be evaluated monthly. It shows you the monthly percentage of recurring revenue you’re losing to canceled subscriptions or product downgrades. 

CLTV/CAC Ratio

Your customer lifetime value (CLTV) to customer acquisition cost (CAC) ratio is central to your success. It compares how much money you’re making from each customer with how pricey they were to acquire. A successful pricing strategy makes customers less hesitant to onboard, which makes them less expensive to acquire because it shortens their buying cycle.

Now let’s look at the various reasons why it’s so critical to select the right pricing strategy.

Why is choosing the right SaaS pricing strategy important?

As we touched on earlier, the recurring charges in the SaaS industry mean that even minuscule pricing differences can have outsized effects over time. 

That’s hardly the only reason to be thorough with your due diligence, however. The right SaaS pricing strategy will also help you: 

• Attract more of your ideal target buyers 
• Increase customer loyalty and boost MRR
• Avoid the traditional “growing pains” that come with scaling 

That’s all well and good. But you’re still left with the task of choosing the best pricing model for your firm. 

How to choose the right pricing model for your SaaS business

Automated cloud-based accounting software is the best path toward a fully optimized SaaS pricing model. 

The right accounting suite will be able to seamlessly guide you through all 4 stages of the pricing model discovery process: 

1. Research & forecast: During this initial stage, finance teams conduct pricing research, and then run automated forecasts on different pricing models, situations and assumptions to discover the best choice for their needs. Automation makes this as simple as plugging in your initial data, and you’ll have a detailed long-range forecast instantly. 

2. Rollout: You’ll want to aim for a minimal-impact rollout, meaning that it’s such a smooth pricing transition you barely notice it. In the accounting confusion of a pricing rollout, many companies have a rough adjustment period that often involves missed or late payments, a rise in churn, and other issues as well. Automation prevents all of this. 

3. Report & analyze: After the pricing rollout, your board will expect a detailed report. Cloud-based reporting gives you immediate access to all your essential SaaS pricing metrics and offers a detailed drill-down on every single transaction. 

4. Adjust as needed: Even the best SaaS billing process needs a bit of creative tweaking now and then. If your team relies on manual accounting processes, adjusting your pricing can be a slow and tedious guessing game. Automation makes it a breeze: simply go back to step 1 and run new forecasts.

Now we’ll get a bit deeper into automation: why is it such a make-or-break factor for today’s SaaS accounting teams?

Why an automated billing system is important for SaaS startups

An automated billing system will give you the greatest degree of flexibility around pricing–researching different options, having the ability to capitalize on customer trends you otherwise would have missed, and much more. 

This is all thanks to the financial clarity that comes with streamlined forecasting and reporting.

Automated forecasting

Automated forecasting will help you select the best pricing model for long-term profitability. After you’ve implemented it, you can continue to forecast any pricing changes, discount campaigns, or other revenue-generating ideas you might have.

Automated reporting

Automated reporting is equally critical. It gives finance teams and stakeholders total transparency around metrics–so they always know what’s working, what isn’t, and why. 

Automated reporting and forecasting will also help you: 

• Identify underperforming features or products so you can improve them or pull them from the market before they drain more resources. 

• Better understand your most loyal customer segments so you can tailor products and deals specifically for them.

• Move beyond product pricing and handle FP&A around vital issues such as hiring, recession management, and more.

As a CFO, peace of mind can be elusive–especially when it comes to an issue as central as your SaaS billing model. Automation takes a large part of the burden off your shoulders, freeing you up to engage in long-term strategizing rather than moment-to-moment problem solving. 

Optimized SaaS billing models through automation

SaaS billing models can be challenging to implement, but they don’t need to be. Automated accounting software can give finance teams the visibility to make highly informed and profitable pricing choices more quickly and easily than ever. 

Learn more on how to build and forecast a usage billing business.